Authored by: Ajay Monga, Partner; & Devmani Bansal, Principal Associate | SNG & Partners
Letter of Credit is the backbone of International Trade & Commerce. In today’s world, most of the trades are dependent upon the performance & non-performance of Letter of Credit & Bank Guarantee(s). Performance of these instruments assume significance importance. Generally, a seller always worried about its payment towards the goods sold, similarly, a buyer is worried about its goods against the payment. Therefore, Letter of Credit/Bank Guarantee(s) bridges the gap as the Bank(s) get involved.
Letter of Credit is an independent and distinct separate contract between two banks.Banks deal in documents not in goods. Letter of Credit is governed by the International Standard Banking Practices being popularly known as Uniform Customs of Practice in DocumentaryCredits, which have been revised from time to time and in short known as “UCP-600”. UCP-600 not only contemplates the guiding factor for Letter of Credit, so far as, it’s execution is concerned but also act as a holistic guide.
The outbreak of Covid-19 has brought the nations to ponder and look for a way forward to boost the shattered economies. Every person, every sector has been unprecedently impacted by this pandemic and so is the Trade & Commerce. The global lockdown by respective nations to tackle the spread of the virus has brought the time to a standstill. There is no movement of goods, banks are not fully operational, ports are closed, shipments are stuck so on and so forth. Most of the contracts remain un-fulfilled leaving parties to suffer more damages. This has resulted in hampering & stalling of theperformance of irrevocable instruments like LCs & Guarantees.
A seller is not be able to present the documents under the confirmed Letter of Credit on account of lockdown; Bank are not able to negotiate the documents with Issuing Bank on account of closure of banking operations; a buyer on the other hand is not in. apposition to take delivery of the goods on account of non-receipt of shipped documents. There are some random instances, which havecreated an perilous situation.
In this kind of extraordinarysituation, every buyer is concerned to protect his money guaranteed by him through a LC. Non-compliance by seller is not an issue. There may be instances where the Seller has complied with its obligations and is entitled to get the LC invoked. The well know exceptions of Fraud and Irretrievable injustice do not exist. Whether in these circumstances, LCs are to be honored or not is a question that courts have been facing since the pandemic and would continue even after this Covid-19 era is over.
Firstly, the Hon’ble Bombay High Court was faced with such prayer for injunction, in the case ofStandard Retail Pvt. Ltd. (“Standard Retail”) v. M/s. G. S. Global Corp & Ors. (“GS Global”), Commercial Arbitration Petition (L) No. 404 of 2020. On 8thApril, 2020, the court refused to give any relief to the Petitioner in relation to the encashment of LCs. In this case, Respondent shipped the goods and performed its part.
On facts, the court observed that the lockdown is for a “limited period” and the lockdown cannot come to the rescue of Standard Retail to prevent it from its contractual obligations.
In another case, a Resolution Professional (RP) of M/s. Punj Lloyd Limited (“PLL”), filed a W.P.(C) 2966/2020 under Article 226 in the Hon’ble Delhi High Court, seeking to quash the actions of Indian Oil Corporation Limited (“IOC”), which sought to invoke certain bank guarantees submitted PLL to IOC. Since NCLT wasn’t functioning, High court was approached. The Court, on 17thApril, 2020, without going into the merits of the case, granted limited relief to the RP to the extent of restraining the encashment of underlying bank guarantees by IOC till the expiry of 1 (one) week from the lifting of the lockdown. Given the nature ofthe interim order, it cannot be said that there was any deviation of the principles governing such injunctions.
The third suchcase came up before the Hon’ble Delhi High Court inM/s Halliburton Offshore Services Inc.(“Halliburton”) v. Vedanta Limited andAnr. (“Vedanta”) O.M.P. (I) (COMM) & I.A. 3697/2020.Petitioner approach the court and sought injunction of a BG on the premise that due to the complete lockdown it is not in a position to complete its part of the contractand thus, apprehends invocation of BG by the Respondent. The claim was resisted that the case is not covered by any of the exceptions to the rule. On April, 20, 2020,the Court observed that the countrywide lockdown, was prima facie in the nature of force majeure and such a lockdown was unprecedented and was incapable of having been predictedand in view of the facts that Petitioner continued to perform till the lockdown was imposed, held that it would justify an ad-interim injunction, restraining invocation or encashment of the bank guarantees.The case is still pending.
Similarly, in a writ petition filed in the High Court of Delhi, to quash the invocation of the bank guarantee by the Ministry of Coal, Union of India, the Court on April 28, 2020 did not find that the invocation of bank guarantee by the Union of India as invalid, illegal or discriminatory. The court took note of the fact that Petitionerhadbeen in non-compliance of milestones and efficiency parameters since April-June 2018 and was granted a twelve-month extension much before the COVID-19 crisis. It was also reiterated that merely because invocation will cause financial distress is not a ground of stay unless the exception of irrevocable injury has been proved. Basis these facts, the Hon’ble Delhi High Court dismissed the petition.
In India, the legal position has been consistent so far as the injunctions in relation to LC and BG is concerned. Ordinarily, *injunctions to restrain obligations under the LCs or BGs are not granted. This rule has two exceptions noted above. The law on this area is well settled and has been reiterated in numerous precedents. The courts are being mindful of these unprecedented circumstances. However, it is important to note that the courts have not resorted to granting injunctions in cases where parties have tried to take the plea of COVID-19 for justifying their non-fulfilment of obligations, even though they were given ample time before the crisis hit the world.